5 minute read 2 Aug 2023

Companies would generally be required to apply settlement date accounting when derecognizing a financial asset or a financial liability.

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How companies could be affected by proposed amendments to IFRS 9

Victor Chan
By Victor Chan

International Director, Global IFRS Services, Ernst & Young Global Limited

Develops insights on applying IFRS to emerging accounting issues. Focuses on leases, crypto-assets, investment property and latest standard-setting activities. Enjoys relaxing with family.

5 minute read 2 Aug 2023
Related topics Assurance IFRS CFO agenda Future of corporate reporting
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Companies would generally be required to apply settlement date accounting when derecognizing a financial asset or a financial liability.

In brief
  • The proposed changes would improve the clarity of some aspects of the guidance on derecognition of financial assets and liabilities.
  • One change addresses payments via electronic payment systems and proposes an exception to settlement date accounting for derecognition of a financial liability.
  • Companies that are likely to be affected need to ensure they are prepared for potentially complex changes to their systems and controls.

The International Accounting Standards Board (IASB) released an exposure draft in March 2023 to propose amendments to IFRS 9 Financial Instruments to clarify or enhance specific areas stakeholders had identified in feedback. Among other changes, the proposed amendments clarify that a company is required to apply settlement date accounting when derecognizing a financial asset or a financial liability. This means the financial asset or financial liability is not derecognized until the cash has arrived in the recipient’s bank account and is available for their use. They would also permit a company to deem a financial liability settled using an electronic payment system to be discharged before the settlement date if specified criteria are met. The IASB will consider the feedback received during the comment letter period (ended July 2023), then decide whether to proceed with the proposed amendments.

Background

The timing for recognizing cash received via an electronic transfer system as settlement for a financial asset was highlighted in a discussion of a submission request at the IFRS Interpretations Committee (IFRS IC) meeting in September 2021. The submission request describes a situation in which a company has a trade receivable with a customer and the customer has initiated a cash transfer via an electronic transfer system. The company receives the cash in its bank account two days after the reporting date, so the question is whether the company can derecognize the trade receivable and recognize cash on the date the cash transfer is initiated, rather than on the date the cash transfer is settled. The IFRS IC, in a tentative agenda decision, concluded that the company derecognizes the trade receivable on the settlement date, when its contractual rights to the cash flows from the trade receivable expire, and recognizes the cash on the same date. However, the IASB did not ratify the IFRS IC agenda decision; instead, it decided to explore narrow-scope standard-setting as part of its post-implementation review of IFRS 9.

Proposed amendments

Although the submission to the IFRS IC referred only to the derecognition of a financial asset, the standard-setting project was extended to the derecognition of a financial liability settled by a payment made through an electronic transfer system. According to the exposure draft, the IASB has proposed to:

  • Clarify that a financial asset or financial liability is not derecognized until the cash has arrived in the recipient’s bank account and is available for their use
  • Permit a company to make an accounting policy election to derecognize the liability, settled in full, or in part, using an electronic payment system, before settlement date if and only if the company has initiated the payment instruction and the following conditions are met:
    • The company has no ability to withdraw, stop or cancel the payment instruction.
    • The company has no practical ability to access the cash to be used for settlement as a result of the payment instruction.
    • The settlement risk associated with the electronic payment system is insignificant. 

Companies would make an accounting policy election to apply this treatment to all financial liabilities settled using a particular electronic payment system. This accounting policy election is limited to electronic payment systems and excludes other payment systems, such as checks.

The IASB’s efforts to develop guidance to clarify certain aspects of the derecognition requirements in IFRS 9 for financial assets and liabilities, in response to discussion at the IFRS IC, is welcome. The optional exception to settlement date accounting for financial liabilities settled via electronic payment systems under certain conditions is a practical response to comments received from stakeholders. It is meant to address concerns raised on the impact on existing practices of moving to a settlement date approach for this type of payment.

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There is long-established diversity in practice in this area, and the proposed amendments are intended to promote greater consistency among companies. At the same time, they offer an accounting policy option to minimize disruption to existing practices. This should enhance comparability of financial information reported by peers in the same sector.

On the other hand, for companies that currently derecognize a financial asset or financial liability before the settlement date, the amendments, if finalized as proposed, would require them to cease this practice and retrospectively change their accounting policies, which could, in turn, affect certain liquidity ratios and other ratios. Even for those companies that qualify to derecognize a financial liability before the settlement date, derecognition may occur at a different time than under their current policies, as those policies may ignore when the payment instructions can be withdrawn, stopped, or canceled, as proposed under the amendments.

The implementation of the proposed amendments will require changes to systems, controls and processes and could be complex for companies operating in a large number of jurisdictions using multiple electronic payment systems. Companies potentially affected by the proposed amendments will likely need to monitor the standard-setting developments and prepare implementation plans in a timely manner.

Summary

The IASB proposed amendments aim to clarify some areas of IFRS 9 and improve consistency in financial reporting. One such change would require companies to apply settlement date accounting to the derecognition of both financial assets and liabilities. The IASB also proposes to extend this to liabilities settled by payment through an electronic transfer system, with a permitted exception to settlement date accounting for companies using electronic transfer systems if certain criteria are met. Such companies would be permitted to make an accounting policy election to derecognize a liability before the settlement date, provided certain conditions are met.

About this article

Victor Chan
By Victor Chan

International Director, Global IFRS Services, Ernst & Young Global Limited

Develops insights on applying IFRS to emerging accounting issues. Focuses on leases, crypto-assets, investment property and latest standard-setting activities. Enjoys relaxing with family.

Related topics Assurance IFRS CFO agenda Future of corporate reporting
Upvote